GIG recently announced the completion of its first Green Bank Advisory Mandate. Our Head of Sustainable Finance, Gavin Templeton, explains what the Mongolian Green Finance Corporation will do and why green banks can play an important role in accelerating the global energy transition.
At the recent UN Climate Action Summit, the Climate Finance Leadership Initiative set out the challenge facing the growth of renewables in emerging markets: while renewable investment is growing steadily, and while renewables are often the lowest cost form of new power generation, little private capital is flowing to countries defined as ‘low-income’ by the World Bank. In fact, these countries saw only 0.1% of total clean energy investment from 2009 to 2018.
Unpicking this challenge shows that often the risks are perceived as too high for private investors and progress is reliant on public finance. Public finance is, however, in short supply. To deliver the ambitions of these emerging countries, and to meet the commitments made to support the Paris Agreement, greater flows of private capital are needed. Achieving that requires a strong local enabling environment and the right institutional structures.
Partnerships are at the heart of successful enabling environments. Institutional structures can include domestic commercial banks and development banks, development finance institutions and multilateral banks, and government ministries responsible for financial and climate policies. With a common goal to tackle climate change, together they can achieve a lot.
Over the past five years, we’ve seen attention increasingly turn to the role of green banks in accelerating and scaling up climate finance. Green banks are financial institutions capitalised with public funds, created specifically to facilitate and accelerate public and private partnerships and investment into green, climate resilient infrastructure. Despite their relatively novel nature, they’ve already developed a strong track record, deploying around US$11 billion for projects with a total value of more than US$41 billion to date according to the Green Bank Network.
The UK Government was the first to create a dedicated green finance institution back in 2012. With a mandate to ‘crowd’ private investment into green energy projects in the UK, in just five years, it deployed £3.2 billion into projects worth a total of £12 billion, mobilising £3 of private finance for every £1 of public investment. Now, as part of the Macquarie Group and operating as the Green Investment Group, we’re leveraging our unique heritage to help countries all over the world set up their own green banks.
Our Green Bank Advisory Service utilises GIG’s first-hand experience in setting up the world’s first green bank to offer bespoke support for governments, multi-lateral organisations and NGOs. Working locally with partners to build capabilities and specialist skills, support is provided for institutional design, knowledge transfer and the development of practical, tailored tools.
During UN Climate Week 2019, we announced the completion of our first Green Bank Advisory Service mandate. Working with the Green Climate Fund (of which Macquarie is an accredited partner) and the Government of Mongolia, we’ve been helping to deliver a new green bank in Mongolia.
Mongolia faces huge challenges. Around half of the population lives in the capital, Ulaanbaatar, using poor quality coal for heating. In fact, more than 90% of Mongolia’s energy still comes from coal. Low pressure coal boilers combined with poorly insulated homes are causing some of the worst air pollution in the world – 30 times the WHO limit, and 3 times higher than Beijing’s red alert levels. But there is an alternative. Mongolia has some of the best solar and wind potential in the world – estimated to be as high as 2.6TW – enough to meet China’s total electricity demand in 20301.
The Mongolian Green Finance Corporation is designed to unlock this potential and support Mongolia’s low carbon transition by scaling up and accelerating investment into green energy and energy efficiency projects, tackling the dual challenges of climate change and air pollution. As part of this work, the Corporation will also work with the Mongolian financial services sector to build domestic capability in green finance.
Green banks can play a particularly important role in emerging economies, such as Mongolia. By acting as cornerstone investors, they provide confidence and reassurance to help private investors get comfortable with new markets and technologies. They also operate in timeframes which are separate to the usual political cycles, providing a greater degree of certainty while also allowing countries to set their own destiny.
The climate crisis is the greatest challenge of our time. Green banks can play a valuable role in accelerating the global transition to a greener economy, and I’m incredibly excited by the opportunity to share GIG’s first-hand experience with countries around the world.
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